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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20394
COACTIVE MARKETING GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1340408
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
415 Northern Boulevard
Great Neck, New York 11021
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 622-2800
--------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
As of October 31, 2003, 5,137,356 shares of the Registrant's Common Stock, par
value $.001 per share, were outstanding.
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INDEX
COACTIVE MARKETING GROUP, INC. AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements of CoActive Marketing
Group, Inc. and Subsidiaries (Unaudited)
Consolidated Balance Sheets - September 30, 2003 and
March 31, 2003 3
Consolidated Statements of Operations - Three month
and six month periods ended September 30, 2003 and
September 30, 2002 4
Consolidated Statement of Stockholders' Equity -
Six month period ended September 30, 2003 5
Consolidated Statements of Cash Flows - Six month
periods ended September 30, 2003 and September 30, 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 14
PART II - OTHER INFORMATION 14
- ---------------------------
Items 1-3. Not Applicable 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Not Applicable 14
Item 6. Exhibits and Reports on Form 8-K. 14
SIGNATURES 15
- ----------
2
PART I - FINANCIAL INFORMATION
COACTIVE MARKETING GROUP, INC.
Consolidated Balance Sheets
September 30, 2003 and March 31, 2003
September 30, March 31,
2003 2003*
----------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 384,996 $ 1,336,886
Accounts receivable, net of allowance for doubtful accounts of
$98,412 at September 30, 2003 and $80,412 at March 31, 2003 9,975,966 9,061,305
Unbilled contracts in progress 4,857,256 5,127,526
Due from affiliate 749,453 722,989
Prepaid expenses and other current assets 1,332,966 730,965
----------- -----------
Total current assets 17,300,637 16,979,671
Property and equipment, net 2,435,311 1,781,226
Investment in MarketVision 295,930 296,130
Note and interest receivable from officer 747,679 733,000
Goodwill, net 18,784,946 18,784,946
Intangible asset 200,000 200,000
Deferred financing costs, net 128,293 190,353
Other assets 144,179 133,372
----------- -----------
Total assets $40,036,975 $39,098,698
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,435,900 $ 6,103,068
Deferred revenue 3,757,892 2,941,547
Accrued job costs 5,409,433 5,071,187
Accrued compensation 137,204 65,467
Other accrued liabilities 1,075,680 1,560,579
Accrued taxes payable 174,272 32,873
Deferred taxes payable 548,097 548,097
Notes payable bank - current 750,000 750,000
Subordinated notes payable - current 425,000 625,000
----------- -----------
Total current liabilities 17,713,478 17,697,818
Notes payable bank - long term 4,609,500 4,500,000
Deferred taxes payable 1,110,046 1,080,046
----------- -----------
Total liabilities 23,433,024 23,277,864
----------- -----------
Stockholders' equity:
Class A convertible preferred stock, par value -- --
$.001; authorized 650,000 shares; none issued and outstanding
Class B convertible preferred stock, par value -- --
$.001, authorized 700,000 shares; none issued and outstanding
Preferred stock, undesignated; authorized 3,650,000 shares; none -- --
issued and outstanding
Common stock, par value $.001; authorized 25,000,000 shares;
issued and outstanding 5,136,731 shares at September 30, 2003
and 5,034,731 shares at March 31, 2003 5,136 5,034
Additional paid-in capital 6,974,690 6,751,792
Retained earnings 9,624,125 9,064,008
----------- -----------
Total stockholders' equity 16,603,951 15,820,834
----------- -----------
Total liabilities and stockholders' equity $40,036,975 $39,098,698
=========== ===========
* The consolidated balance sheet as of March 31, 2003 has been summarized from
the Company's audited balance sheet as of that date. See accompanying notes to
unaudited consolidated financial statements.
3
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Operations
Three Month and Six Month Periods Ended September 30, 2003
and September 30, 2002
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales $ 16,881,117 13,332,639 32,953,757 27,476,631
Direct expenses 13,465,241 9,969,486 25,946,452 21,198,153
------------ ------------ ------------ ------------
Gross Profit 3,415,876 3,363,153 7,007,305 6,278,478
------------ ------------ ------------ ------------
Salaries and payroll taxes 1,266,135 1,173,907 2,548,531 2,349,582
Selling, general and administrative expense 1,676,893 1,332,236 3,336,767 2,696,177
------------ ------------ ------------ ------------
Total operating expenses 2,943,028 2,506,143 5,885,298 5,045,759
------------ ------------ ------------ ------------
Operating income 472,848 857,010 1,122,007 1,232,719
Interest expense, net 56,800 91,484 120,108 158,375
------------ ------------ ------------ ------------
Income before provision for income taxes 416,048 765,526 1,001,899 1,074,344
Provision for income taxes 192,209 306,201 441,582 429,758
Equity in income (loss) of affiliate 7,300 (9,500) (200) (30,500)
------------ ------------ ------------ ------------
Net income 231,139 449,825 560,117 614,086
------------ ------------ ------------ ------------
Net income per common and common
Equivalent share:
Basic $ .05 $ .09 $ .11 $ .12
============ ============ ============ ============
Diluted $ .04 $ .08 $ .09 $ .11
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding:
Basic 5,135,035 5,028,481 5,127,780 5,028,481
============ ============ ============ ============
Diluted 6,223,819 5,372,657 6,122,859 5,452,098
============ ============ ============ ============
Reconciliation of weighted average shares used for
basic and diluted computation is as follows:
Weighted average shares - Basic 5,135,035 5,028,481 5,127,780 5,028,481
Dilutive effect of options and warrants 1,088,784 344,176 995,079 423,617
============ ============ ============ ============
Weighted average shares - Diluted 6,223,819 5,372,657 6,122,859 5,452,098
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
4
COACTIVE MARKETING GROUP, INC.
Consolidated Statement of Stockholders' Equity
Six Months Ended September 30, 2003
(Unaudited)
Common Stock
par value $.001 Additional Total
------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -----------
Balance, March 31, 2003 5,034,731 $ 5,034 $ 6,751,792 $ 9,064,008 $15,820,834
Stock issued in payment of earnout 100,000 100 217,900 218,000
Exercise of options 2,000 2 4,998 -- 5,000
Net income -- -- -- 560,117 560,117
----------- ----------- ----------- ----------- -----------
Balance, September 30, 2003 5,136,731 $ 5,136 $ 6,974,690 $ 9,624,125 $16,603,951
=========== =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
COACTIVE MARKETING GROUP, INC.
Consolidated Statements of Cash Flows
Six Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 560,117 $ 614,086
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for bad debt expense 18,000 15,000
Equity in loss of affiliate 200 30,500
Depreciation and amortization 344,696 335,980
Deferred income taxes 30,000 --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (932,661) (891,520)
Decrease in unbilled contracts in progress 270,270 758,015
(Increase) in prepaid expenses and other assets (612,808) (76,580)
(Decrease) increase in accounts payable (667,168) 98,420
Increase in deferred revenue 816,345 716,227
Increase (decrease) in accrued job costs 338,246 (871,206)
Increase in accrued taxes payable 141,399 221,884
Decrease in other accrued liabilities (266,899) (360,436)
Increase in accrued compensation 71,737 17,879
------------ ------------
Net cash provided by operating activities 111,474 608,249
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (931,721) (192,379)
(Increase) decrease in notes receivable from officer (14,679) 63,000
Increase in advances to affiliate (26,464) --
------------ ------------
Net cash used in investing activities (972,864) (129,379)
------------ ------------
Cash flows from financing activities:
Repayments of debt (90,500) (1,386,667)
Financing costs (5,000) --
Proceeds from exercise of stock options 5,000 --
------------ ------------
Net cash used in financing activities (90,500) (1,386,667)
------------ ------------
Net decrease in cash and cash equivalents (951,890) (907,797)
Cash and cash equivalents at beginning of period 1,336,886 1,959,617
------------ ------------
Cash and cash equivalents at end of period $ 384,996 $ 1,051,820
============ ============
Supplemental disclosure:
Interest paid during the period $ 136,694 $ 161,868
============ ============
Income tax paid during the period $ 192,152 $ 188,325
============ ============
Noncash activities relating to investing activities:
Contingent earnout accrued relating to a prior acquisition $ -- $ 1,000,000
============ ============
Earnout applied to purchase of common stock $ 218,000 $ --
============ ============
See accompanying notes to unaudited consolidated financial statements
6
CoActive Marketing Group, Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
September 30, 2003 and 2002
(1) Basis of Presentation
---------------------
The interim financial statements of CoActive Marketing Group, Inc. (the
"Company") for the three and six month periods ended September 30, 2003
and 2002 have been prepared without audit. In the opinion of
management, such consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary to
present fairly the Company's results for the interim periods presented.
The results of operations for the three and six month periods ended
September 30, 2003 are not necessarily indicative of the results for a
full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 2003.
(2) Goodwill and Intangible Asset
-----------------------------
On April 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations," and
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141
requires the use of the purchase method of accounting and prohibits the
use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also requires that
the Company recognize acquired intangible assets apart from goodwill if
the acquired intangible assets meet certain criteria. It also requires,
upon adoption of SFAS 142, that the Company reclassify, if necessary,
the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS 141. The Company has determined that the
classification and useful lives utilized for its intangible assets are
appropriate. SFAS 142 requires, among other things, that companies no
longer amortize goodwill, but instead test goodwill for impairment at
least annually. In addition, SFAS 142 requires that the Company
identify reporting units for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life.
The Company's goodwill, which is primarily related to the Company's
prior acquisitions of its subsidiaries, and the Company's other
intangible asset, which was acquired in fiscal 2002 and consists of an
Internet domain name and related intellectual property rights being
used in the Company's operations, are no longer amortized but are
instead subject to an annual impairment test. The Company has completed
its annual impairment review as of March 31, 2003 and no impairment in
the recorded goodwill and intangible asset was identified. During the
quarter and six month periods ended September 30, 2003, the Company has
not identified any indication of goodwill impairment. Goodwill and the
intangible asset will be tested annually at the end of each fiscal year
to determine whether they have been impaired. Upon completion of each
annual review, there can be no assurance that a material charge will
not be recorded.
7
(3) Earnings Per Share
------------------
Options and warrants, which expire through April 30, 2011, to purchase
478,000 shares of common stock at prices ranging from $4.00 to $10.00
and 496,750 shares of common stock at prices ranging from $3.25 to
$10.00 per share were outstanding during the three and six month
periods ended September 30, 2003 and 2002, respectively. These options
and warrants were excluded from the computation of diluted earnings per
share for each period because the exercise prices exceeded the then
fair market value of the Company's common stock.
(4) Unbilled Contracts in Progress
------------------------------
Unbilled contracts in progress represents revenue recognized in advance
of billings rendered based on work performed to date on certain
contracts. Accrued job costs are also recorded for such contracts to
properly match costs and revenue.
(5) Deferred Revenue
----------------
Deferred revenue represents contract amounts billed and client advances
in excess of costs incurred and estimated profit earned.
(6) Income Taxes
------------
The provision for income taxes for the three and six month periods
ended September 30, 2003 and 2002 is based upon the Company's estimated
effective tax rate for the respective fiscal year.
(7) Accounting for Stock-Based Compensation
---------------------------------------
The Company applies the intrinsic-value based method of accounting
prescribed by Accounting Principles Board (APB) No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, in accounting
for its stock-based compensation plans and accordingly, no compensation
cost has been recognized for the issuance of stock options in the
consolidated financial statements. The Company has elected not to
implement the fair value based accounting method for employee stock
options under SFAS No. 123, "Accounting for Stock-Based Compensation",
but has elected to disclose the pro forma net income per share for
employee stock option grants made beginning in fiscal 1997 as if such
method had been used to account for stock-based compensation costs
described in SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure", an amendment of SFAS No. 123.
The following table illustrates the effects on net income and per share
data as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to its stock based incentive plans:
8
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income applicable to common stock $ 231,139 $ 449,825 $ 560,117 $ 614,086
Less compensation expense determined under the
fair value method 60,976 16,810 121,952 33,620
----------- ----------- ----------- -----------
Adjusted net income $ 170,163 $ 433,015 $ 438,165 $ 580,466
=========== =========== =========== ===========
Net income per share applicable to common stock:
Basic $ .04 $ .09 $ .11 $ .12
Less compensation expense determined under the
fair value method .01 .00 .02 .01
----------- ----------- ----------- -----------
Adjusted basic net income per share $ .03 $ .09 $ .09 $ .11
=========== =========== =========== ===========
Net income per share applicable to common stock:
Diluted $ .04 $ .08 $ .09 $ .11
Less compensation expense determined under the
fair value method .01 .00 .02 .01
----------- ----------- ----------- -----------
Adjusted diluted net income per share $ .03 $ .08 $ .07 $ .10
=========== =========== =========== ===========
(8) New Accounting Standards
------------------------
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),"Consolidation
of Variable Interest Entities" with the objective of improving financial
reporting by companies involved with variable interest entities. A variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003,
and applies in the first year or interim period ending after December 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2002. The Company has not determined the
effect, if any, that this pronouncement would have on its financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after December 15, 2004. The statement is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. Management does not
believe this statement will have a material impact on the Company's financial
statements.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-----------------------------------------------------------------------
The following discussion compares the Company's consolidated
results of operations for the three and six month periods ended September 30,
2003 to the Company's consolidated results of operations for the three and six
month periods ended September 30, 2002. The information herein should be read
together with the consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended March 31, 2003.
Results of Operations
The following table presents operating data of the Company, expressed
as a percentage of sales for each of the three and six month periods ended
September 30, 2003 and 2002:
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Statement of Operations Data:
Sales 100.0% 100.0% 100.0% 100.0%
Direct expenses 79.8% 74.8% 78.7% 77.1%
Gross profit 20.2% 25.2% 21.3% 22.9%
Salaries 7.5% 8.8% 7.7% 8.6%
Selling, general and administrative expense 9.9% 10.0% 10.1% 9.8%
Total operating expenses 17.4% 18.8% 17.9% 18.4%
Operating income 2.8% 6.4% 3.4% 4.5%
Interest expense, net 0.3% 0.7% 0.4% 0.6%
Income before provision for income taxes 2.5% 5.7% 3.0% 3.9%
Provision for income taxes 1.1% 2.3% 1.3% 1.6%
Net income 1.4% 3.4% 1.7% 2.2%
The following table presents operating data of the Company, expressed
as a comparative percentage of change for the three and six month periods ended
September 30, 2003 compared to the three and six month periods ended September
30, 2002 and the three and six month periods ended September 30, 2002 compared
to the three and six month periods ended September 30, 2001:
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Statement of Operations Data:
Sales 26.6% (12.5%) 19.9% (11.4)
Direct expenses 35.1% (11.6%) 22.4% (9.4%)
Gross profit 1.6% (15.3%) 11.6% (17.4%)
Salaries 7.9% (31.5%) 8.5% (28.8%)
Selling, general and administrative expense 25.9% (22.7%) 23.8% (22.1%)
Total operating expenses 17.4% (27.1%) 16.6% (25.4%)
Operating income (44.8%) 61.0% (9.0%) 46.8%
Interest expense, net (37.9%) (24.0%) (24.2%) (42.5%)
Income before provision for income taxes (45.7%) 83.2% (6.7%) 64.4%
Provision for income taxes (37.2%) 85.4% 2.8% 63.8%
Net income (48.6%) 81.6% (8.8%) 57.0%
10
Sales. Sales for the quarter ended September 30, 2003 were
$16,881,000, compared to sales of $13,333,000 for the quarter ended September
30, 2002, an increase of $3,548,000, after including $4,230,000 and $1,893,000,
respectively, of reimbursable costs and expenses. Sales for the six months ended
September 30, 2003 were $32,954,000, compared to sales of $27,477,000 for the
six months ended September 30, 2002, an increase of $5,477,000, after including
$8,594,000 and $4,674,000, respectively, of reimbursable costs and expenses. The
increase for the quarter and six month period was primarily attributable to the
amount of sales contracted during the respective periods.
While the Company had a modest increase in sales, net of
reimbursable costs and expenses, for the quarter and six month periods,
additional sales for the quarter were anticipated. The Company was unable to
recognize these sales in the second quarter as a result of a delay in the launch
of a marketing program due to the grocer's strike in southern California. The
Company anticipates that these sales will be recognized over the balance of the
fiscal year. At any given time, comparative differences in the Company's sales
and sales backlog may vary due to timing differences in the receipt of executed
contracts from clients with respect to project assignments being finalized.
Direct Expenses. Direct expenses for the quarter ended
September 30, 2003 were $13,465,000, compared to $9,969,000 for the comparable
prior year quarter, an increase of $3,496,000, after including $4,230,000 and
$1,893,000, respectively, of reimbursable cost and expenses. Direct expenses for
the six months ended September 30, 2003 were $25,946,000, compared to
$21,198,000 for the comparable prior year six month period, an increase of
$4,748,000, after including $8,594,000 and $4,674,000, respectively, of
reimbursable costs and expenses. The increase in direct expenses for the quarter
and six month period was primarily attributable to an increase in variable
direct expenses which are applicable to and relate to the increase in sales for
the respective periods. The respective increase in direct expenses as a
percentage of sales for both the quarter and for the six month period ended
September 30, 2003 was primarily the result of the aggregate mix of client
projects having a lower gross profit margin than the mix of the Company's
projects in the quarter and six month period ended September 30, 2002.
Gross Profit. As a result of the changes in sales and direct
expenses, the Company's gross profit for the quarter and six month period ended
September 30, 2003 increased to $3,416,000 and $7,007,000, respectively, from
$3,363,000 and $6,278,000 for the quarter and six month period ended September
30, 2002.
Operating Expenses. Operating expenses for the quarter and six
month period ended September 30, 2003 increased by $437,000 and $840,000,
respectively, and amounted to $2,943,000 and $5,885,000, respectively, compared
to $2,506,000 and $5,046,000, respectively, for the quarter and six month period
ended September 30, 2002. The increase in operating expenses for the quarter and
six month period was primarily the result of (i) the increase in salaries and
related payroll expenses of $92,000 and $199,000 in the respective periods, and
(ii) the increase in selling, general and administrative expenses of $345,000
and $641,000 in the respective periods. The increase in salaries and related
payroll expenses for the quarter and six month period ended September 30, 2003
was primarily attributable to an overall increase in salaries and the cost of
added personnel in support of anticipated increases in the level of operations.
The increase in selling, general and administrative expenses for the quarter and
six month periods ended September 30, 2003 were primarily related to the
increased level of operations which included increased marketing and selling
expenditures.
Interest Expense, Net. Net interest expense, consisting of
interest expense of $64,000 offset by interest income of $7,000, for the quarter
ended September 30, 2003 amounted to $57,000, a decrease of $34,000, compared to
net interest expense of $91,000, consisting of interest expense of $92,000
offset by interest income of $1,000 for the quarter ended September 30, 2002.
Net interest expense, consisting of interest expense of $135,000 offset by
interest income of $15,000, for the six months ended September 30, 2003 amounted
to $120,000, a decrease of $38,000, compared to net interest expense of
$158,000, consisting of interest expense of $162,000 offset by interest income
of $4,000, for the six months ended September 30, 2002. The decrease in interest
expense for the quarter and six month period ended September 30, 2003 was
primarily related to the decrease in the Company's outstanding bank and
subordinated debt borrowings during such periods.
Provision For Income Taxes. The provision for federal, state
and local income taxes for the quarters and six month periods ended September
30, 2003 and 2002, were based upon the Company's estimated effective tax rate
for the respective fiscal years.
11
Equity in Income (Loss) of Affiliate. For the quarter ended
September 30, 2003, the Company recorded $7,300 as it share of income from its
49% equity investment in MarketVision, compared with ($9,500) recorded as its
share of loss for the quarter ended September 30, 2002. For the six months ended
September 30, 2003, the Company recorded ($200) as its share of losses from its
49% equity investment in MarketVision, compared with ($30,500) recorded as its
share of such losses for the six month ended September 30, 2002.
Net Income. As a result of the items discussed above, net
income for the quarter and six month period ended September 30, 2003 was
$231,000 and $560,000 respectively, compared to net income $450,000 and $614,000
respectively, for the prior year quarter and six month period ended September
30, 2002.
Liquidity and Capital Resources.
On October 31, 2002, the Company entered into a Credit
Agreement (the "Credit Agreement") with Signature Bank (the "Lender") pursuant
to which the Company obtained a $3,000,000 term loan (the "Term Loan") and a
$3,000,000 three year revolving loan credit facility (the "Revolving Loan", and
together with the Term Loan, the "Loans"). The principal amount of the Term Loan
is repayable in equal installments over 48 months, with the final payment due
October 30, 2006. Interest on the Loans is due on a monthly basis at an annual
rate equal to the Lender's prime rate plus .25% with respect to Revolving Loans
and .50% with respect to the Term Loan (4.25% and 4.5% respectively, at
September 30, 2003). On July 18, 2003, the Credit Agreement was amended pursuant
to which the revolving loan credit facility was increased by $500,000 to
$3,500,000.
For the six months ended September 30, 2003, the Company's
activities, inclusive of a final earnout payment of $376,000 in connection with
the Company's acquisition of U.S. Concepts and expenditures of $932,000 for
fixed assets consisting of equipment, leasehold improvements and furniture and
fixtures, a significant amount of which relates to the Company's relocation of
its New York City office, were funded from working capital. At September 30,
2003, the Company had cash and cash equivalents totaling $385,000, a working
capital deficit of $413,000, outstanding bank loans of $5,360,000 with no
additional availability under the Revolving Loan, outstanding subordinated debt
of $425,000 and stockholders' equity of $16,604,000. In comparison, at March 31,
2003, the Company had cash and cash equivalents of $1,337,000 and a working
capital deficit of $718,000, outstanding bank loans of $5,250,000 with no
additional availability under the Revolving Loan, outstanding subordinated debt
of $625,000 and stockholders' equity of $15,821,000. The $305,000 decrease in
working capital deficit at September 30, 2003 compared with March 31, 2003
resulted in part from increases in prepaid expenses and accounts receivable, and
decreases in accounts payable, offset by decreases in cash and increases in
deferred revenue, accrued job costs and accrued taxes payable at September 30,
2003. As a result of utilizing its short term working capital for aggregate
expenditures of approximately $885,000 in connection with its acquisition in
October 2003 of TrikMedia's assets (as described below) and expenditures over
the last nine months of $950,000 plus a $500,000 letter of credit associated
with the relocation of its New York City office in August 2003, the Company's
working capital availability is constrained. Management believes that the
purchase of TrikMedia's assets represented a significant opportunity for the
Company that required timely action. The Company intends to replenish its
working capital availability by securing additional longer term financing of
approximately $2.0 million. Consequently, management is in the process of
seeking and is currently of the opinion that it will achieve such financing.
However, there can be no assurances that the Company will be successful in this
regard or upon what terms and costs such financing would be available.
For the six months ended September 30, 2003: (A) cash provided
by operating activities was $111,000, due principally to the net effect of the
aggregate of net income of $560,000, the non-cash charges for depreciation and
amortization of $345,000, deferred income taxes of $30,000 and the provision for
bad debt expense of $18,000, a decrease of $270,000 in unbilled contracts in
progress, increases of $816,000, $338,000 and $213,000, respectively, in
deferred revenue, accrued job costs, and accrued compensation and taxes payable,
offset by increases in accounts receivable of $933,000 and prepaid expenses and
other assets of $613,000 and decreases in accounts payable of $667,000 and other
accrued liabilities of $267,000; (B) cash used in investing activities amounted
to $973,000, as a result of the aggregate of $932,000 used to purchase fixed
assets, an increase in notes receivable from an officer of $15,000 applicable to
accrued interest and an increase in advances to affiliate (MarketVision) in the
amount of $26,000; and (C) cash used in financing activities to repay borrowings
amounted to $91,000. As a result of the net effect of the aforementioned, the
Company's cash and cash equivalents at September 30, 2003 decreased by $952,000.
12
Other Matters.
On April 14, 2003, the Company issued 100,000 shares of its
common stock, with an aggregate contract value, based on the U.S. Concepts
acquisition agreement, of $218,000 at such date, in partial satisfaction of the
Company's earnout obligations in connection with its acquisition of its U.S.
Concepts subsidiary. The amount of such obligation was previously reflected on
the Company's financial statements for the periods ended March 31, 2003 as
additional purchase price payable pursuant to the terms of the U.S. Concepts
acquisition agreement.
On March 31, 2003, the Company converted its subsidiary
corporations (then Inmark Services, Inc., Optimum Group, Inc., and U.S.
Concepts, Inc.) into Delaware limited liability companies (now Inmark Services
LLC, Optimum Group LLC, and U.S. Concepts LLC).
On October 29, 2003, a newly formed wholly-owned subsidiary of
the Company purchased certain assets of TrikMedia, Inc. for cash in the amount
of $885,000. TrikMedia, founded in 2000, was a full service multimedia agency
engaged in providing digital marketing and advertising services, interactive
software development and content creation. These services will now be provided
by the Company to former clients of TrikMedia. The Company believes that this
acquisition will provide it with capabilities that complement and add value to
the Company's existing interactive service offerings, and will provide the
Company with the opportunity to increase sales to both existing and prospective
clients.
Outlook.
The Company expects net income for its third quarter ending
December 31, 2003 will be substantially improved over net income for its second
quarter, but marginally down as compared to its third fiscal quarter ended
December 31, 2002, which was a particularly strong quarter. The Company further
expects that net income for the fourth quarter will be especially strong due to
increased sales in such quarter. Accordingly, the Company maintains its guidance
of a 25%-30% increase in earnings per share for its fiscal year ending March 31,
2004.
Forward-Looking Statements.
This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are based on
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used in this
report, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect," "plan," "predict," "may," "should," "will," the negative thereof or
other variations thereon or comparable terminology are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events based on currently available information
and are subject to risks and uncertainties that could cause actual results to
differ materially from those contemplated in those forward-looking statements.
Factors that could cause actual results to differ materially from the Company's
expectations are set forth in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 2003 under "Risk Factors", including but not limited
to "Dependence on Key Personnel," "Customers," "Unpredictable Revenue Patterns,"
"Competition," "Risk Associated with Acquisitions," "Expansion Risk," "Control
by Executive Officers and Directors," and "Outstanding Indebtedness; Security
Interest." Other factors may be described from time to time in the Company's
public filings with the Securities and Exchange Commission, news releases and
other communications. The forward-looking statements contained in this report
speak only as of the date hereof. The Company does not undertake any obligation
to release publicly any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company's earnings and cash flows are subject to
fluctuations due to changes in interest rates primarily from its investment of
available cash balances in money market funds with portfolios of investment
grade corporate and U.S. government securities and, secondarily, from its
long-term debt arrangements. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes.
13
Item 4. Controls and Procedures
-----------------------
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
in the Company's reports filed or submitted under the Securities and Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the Company's reports filed under the Exchange Act is accumulated
and communicated to management, including the Company's Chief Executive Officer
and Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
As of the end of the period covered by this quarterly report,
the Company conducted an evaluation of the effectiveness of the design and
operation of the Company's "disclosure controls and procedures", required by
Rule 13a-15 under the Exchange Act of 1934. This evaluation was carried out
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective.
There have been no significant changes in the Company's
internal control over financial reporting which could materially affect,
internal control over financial reporting.
PART II - OTHER INFORMATION
---------------------------
Items 1-3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on
September 25, 2003 at 10:00 a.m. at the Company's offices at 415 Northern
Boulevard, Great Neck, New York 11021. A majority of the Company's voting shares
were present at the meeting, either in person or by proxy.
At such meeting, as set forth in the table below, the
stockholders elected Paul A. Amershadian, John P. Benfield, Donald A. Bernard,
Herbert M. Gardner, Joseph S. Hellman, Thomas E. Lachenman, Brian Murphy and
John A. Ward, III to the Board of Directors. All of these individuals will serve
on the Board of Directors until the next annual meeting of stockholders and
until their successors are duly elected and qualified.
Directors Votes For Votes Withheld
--------- --------- --------------
Paul A. Amershadian 4,296,354 2,500
John P. Benfield 4,296,354 2,500
Donald A. Bernard 4,296,354 2,500
Herbert M. Gardner 4,296,354 2,500
Joseph S. Hellman 4,296,354 2,500
Thomas E. Lachenman 4,296,354 2,500
Brian Murphy 4,296,354 2,500
John A. Ward III 4,295,979 2,875
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. See Exhibit Index
(b) Reports on Form 8-K. On August 11, 2003, the Company
furnished a report on Form 8-K relating to a press release it issued with
respect to financial results for its fiscal quarter ended June 30, 2003.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COACTIVE MARKETING GROUP, INC.
Dated: November 12, 2003 By: /s/ JOHN P. BENFIELD
--------------------------------------
John P. Benfield, President
(Principal Executive Officer)
and Director
Dated: November 12, 2003 By: /s/ DONALD A. BERNARD
--------------------------------------
Donald A. Bernard, Executive Vice
President and Chief Financial Officer
(Principal Accounting and Financial
Officer) and Director
15
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
16